- INVENTORY MANAGEMENT OF ENGINEERING GOODS INDUSTRY IN PUNJAB: AN EMPIRICAL ANALYSISIS

INVENTORY MANAGEMENT OF ENGINEERING GOODS INDUSTRY IN PUNJAB: AN EMPIRICAL ANALYSISIS

Dr. ANITA SONI

Objectives of Inventory Control

1) Maximize the level of customer service by avoiding

understocking. 2) Promote efficiency in production and purchasing by minimizing the cost of providing an adequate level of customer service.

 Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.
Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be

Inventory
Def. - A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.
Raw Materials Works-in-Process Finished Goods Maintenance, Repair and Operating (MRO)

Objectives of the Study

i). To examine the effectiveness of inventory management practices of the engineering goods industries in Punjab by ratio analysis. ii). To know the association of inventory with sales and profit. iii). To make suggestion and develop strategies for effective inventory management and to prescribe remedial measures to encounter the problems faced by the industry

Sample Size

eleven groups of engineering units have been selected out of 3951 registered units for present study. Sample units are selected mainly out of code number 28, 29, 31, 34. An intensive and comprehensive survey of industry has been conducted for the last five years . proportionate sample has been drawn from the four selected districts of the study state namely; Ludhiana, Jalandhar, Amritsar and Kapurthala, as more than eighty per cent of the engineering goods units are concentrated in these districts only by applying multistage sampling.

Inventory to cash ratio

Inventory to cash ratio in machine & machine parts , hand tools, rail components, electrical goods and pipe fitting units has declined over the years. Inventory to cash ratio in steel furniture units which was .8 up to 2007-08, abruptly increased to 3.5 times in 2008-09.Growth rate of this ratio varies between 23.8 to 34.7 per cent.

Inventory to Current Assets Ratio

It is revealed that share of inventory to current assets in

auto parts units was found 24 per cent in comparison to 25 per cent in cycle and machinery parts, 32 per cent in hand tools, 28 per cent in rail components, 35 per cent in electrical goods, 21 per cent in pipe fitting, 18 per cent in machine tools, 31 per cent in screw valves and 21 per cent in steel furniture units.

Average Inventory and Sales: Regression Analysis

To find the effect of sale on the inventory, regression test is

applied by taking inventory as dependent variable and sales as independent variable. Significant effect of sale on the inventory at 99 per cent confidence level has been observed. Value of R2 shows that there is 68 per cent dependency of inventory on the sale. Thus ,there is a moderate correlation between inventory and sales. So, null hypothesis is rejected as there is no significant relationship between sales and inventory. It has been observed that the sales has increased proportionally at faster rate as compared to inventory

CONCLUSION &Suggestion
The analysis of inventory management of engineering goods

industry in Punjab reveals that size of inventory has increased marginally over the period under study as compared to its proportionate growth against current assets, and net working capital. Half of the gross working capital has been used for inventory.

 Such a huge investment in the inventory has resulted

into overstocking of inventory in the study units due to low velocity/circulation of inventory and high holding period, particularly of finished goods and raw material. . Primary reason for shortage of inventory has been found shortage of inventory followed by price fluctuation. It has been found during the study that selected units do not pay much attention to modern techniques of inventory i.e. economic order quantity and safely stock.

Inventory holding period shows that though the holding periods of all the components has shown a declining trend due to increase in demand and production yet, on the basis of analysis it may be held that there is ample scope for improvement to reduce the holding period of inventory from its present level, accelerating the velocity/ circulation of inventory and adjusting the growth in inventory with relative change in sales. Regression analysis between inventory and sale shows that there is a significant effect o sale on the inventory at 99% confidence level.

 Inventory level should be fixed up scientifically and

introduction of JIT is prescribed so that inventory carrying cost can be reduced to the minimum extent. No inventory should be allowed to accumulate, as the inventory is the graveyard of business. Practicing JIT reduces inventories at all stages of purchasing just in time to produce and producing just in time to sell. Traditional practices call for infrequent orders of large lots of materials and supplies, well in, advance of when the same is needed for production.

It has been observed that the sales have increased proportionally at faster rate as compared to inventory. Upon delivery, material and supplies are made available directly onto assembly line. The firm under study should produce goods continuously at roughly the same rate the goods are sold thus if sales declines, production declines too in step to prevent accumulation of inventories.

 To bring down the properties of unnecessarily locking up

of fund investment in raw material inventory, there is a need to fix norms on scientific basis for stocking various raw material items by introducing immediately cost audit/ management audit/quality review board.

To deal with high holding period of inventory which indicates locking up excessive investment in inventory, the engineering industry should concentrate on production and raw materials which constitute two third of total holding inventory of the industry , has high holding period as compared to other components. Reduction in holding period of finished goods is possible by achieving the marketing function of industry.

 Further, it is suggested that the engineering goods units

should pay much attention to modern methods of inventory level like economic order quantity and safely stock, which they have not been found following.

 There are many steps to solve the problem of shortage

of inventory as taking loan from institutions, retained earnings, or placing order in time, planned reorder level and maintain safety stock. It is suggested that to overcome the marketing problem, an effective sales promotion strategy has to be reviewed.

Thank you